ASSOSIM. Re: Response to CESR consultation Inducements under MIFID (06-687)

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1 PIAZZA BORROMEO MILANO TEL. 02/ R.A. TELEFAX 02/ e.mail ASSOSIM ASSOCIAZIONE ITALIANA INTERMEDIARI MOBILIARI Milan, 9 th February 2007 CESR Avenue de Friedland Paris France Dear Mr. Demarigny, Re: Response to CESR consultation Inducements under MIFID (06-687) Assosim welcomes the opportunity to comment on CESR s Public Consultation on Inducements under MIFID. CESR s work at Level 3 to promote consistent supervisory practices across EU is of the outmost importance for the banks and investment firms which are members of Assosim and which account for more than 80% of the volumes traded on Borsa Italiana. In general, we are broadly in agreement with the vast majority of the analysis put forward in this consultation paper. However, we are concerned that the way in which CESR interprets the relationship between Article 21 and Article 26 of the implementing directive may result into applying the provisions on inducements to a far wider range of payments than is intended under the directive itself. In particular we are of the opinion that the definition of inducement should be restricted to payments which are meant, or have the potentiality to induce the recipient to act differently from how they would otherwise have done. By the same token, payments which are not intended to induce a firm to act in a way which is inconsistent with its clients interests, should not be subject to Article 26 restrictions at all. As a matter of fact, the language of Article 26(c), which refers to payments which cannot, by their nature, give rise to conflicts, demonstrates that the principle of conflict is implicit in the concept of an inducement. It is only where the possibility of the receipt of a fee can act as an incentive for a firm to act other than in the best interests of its clients that it should be treated as an inducement and fall under Article 26. In the light of the fact that the above, we consider that any inducement has to comply with both the provisions in Article 26 and those in Article 21. As a consequence, it would not be sufficient for a firm to manage the relevant conflicts in order to escape the conditions set forth in Article 26. Finally, we believe that it would be very useful if CESR could also consider in its work the interrelationship between inducement and best execution in order to provide guidance as to the way in which payments and other non monetary benefits paid by a third party (and which are meant to enhance the quality of the service provided to the relevant client) interact with the other factors to be taken into account by a firm under Article 21(1) MiFID for determining the best possible result for their clients. Member of ICSA - International Council of Securities Associations-

2 As to the specific questions in the consultation paper, we would like to make the following comments. Question 1. Do you agree with CESR that Article 26 applies to all and any fees, commissions and non-monetary benefits that are paid or provided to or by an investment firm in relation to the provision of an investment or ancillary service to a client? We do not think that CESR s analysis is consistent with MIFID provisions. The scope of the provisions in Article 26 is to be restricted to fees, commissions, and nonmonetary benefits which might induce someone to act in a way that they would not otherwise have done. Question 2. Do you agree with CESR s analysis of the general operation of Article 26 of the MIFID Level 2 Implementing Directive and of its interaction with Article 21? CESR s conclusions go further than can be established under MIFID. As we already said in the introduction, we are firmly convinced that the principle of conflict is implicit in the concept of an inducement. Question 3. Do you agree with CESR s view of the circumstances in which an item will be treated as a fee, commission or non-monetary benefit paid or provided to or by a person acting on behalf of the client? We strongly maintain that Article 26(a) should be restricted to circumstances where the third party acts on an explicit instruction by the client. The mere fact that a commission sharing agreement has been disclosed to a client cannot be interpreted as an implicit instruction given by the client to such payment or that the payment has been carried out on the client s behalf. Question 4. What, if any, other circumstances do you consider there are in which an item will be treated as a fee, commission or non-monetary benefit paid or provided to or by the client or a person acting on behalf of the client? We do not exclude that there might payments other than those provided for in the consultation paper which may fall under the scope of Article 26(a). However it needs to be made clear that a payment cannot be held as made on behalf of a client, unless such client has specifically instructed the payer to carry out the payment. Question 5. Do you have any comments on the CESR analysis of the conditions on third party receipts and payments? As to the term designed to enhance the quality of the relevant service to the client, we hold the view that the relevant benefit should be restricted to the specific client which pays for the service. Accordingly, whenever a payment results in a benefit for either a 2

3 community of clients wider than the ones who bear the relevant costs or the investment firm itself, it cannot be considered a legitimate inducement despite the fact that it has been disclosed to the client itself. With regard to paragraph 22, we doubt that Article 26(b) requires that a payment or other non monetary benefit should also pass a proportionality test in order to be considered a legitimate inducement. To the extent that any such payment or non monetary benefit is reverted to the exclusive advantage of the client who bears the relevant cost, we do not understand how the amount of this advantage could turn it into a prohibited inducement. We do believe, however, that a proportionality test should apply to payments falling within the scope of Article 26(c) of the implementing directive. Finally, as far as CESR s examples are concerned, we also have the following specific comments: Example 1. See our comments to Para 22. Example 2. See our comments to Para 22. Example 3. We agree that the arrangement that CESR describes appears to be an inducement. Whether or not it satisfies the requirement that it be designed to enhance the quality of the service would need to be determined on the facts of the case. However, to the extent that the money paid to the portfolio manager (or RTO firm) is neither actually repaid to the clients who bear the relevant costs nor does it turn into a benefit for their exclusive advantage, we would conclude that the situation described amount to an illegal inducement. Example 4. We consider that training provided, for example for free, at a discount price or in an exotic holiday location, is likely to be an inducement. Example 5. We believe that the legitimacy of such commission sharing arrangements should rather be assessed under Article 26(c) and be banned where they give rise to conflicts with the firm's duties to act honestly, fairly and professionally in accordance with the best interests of its clients. Any relevant payment or non monetary benefit should not be designed as to bias the conduct of the firm receiving it; accordingly commissions, fees and other non monetary benefit should be proportionate to the actual contribution catered by this firm to the service provided to the final customer. Example 6. inducement. We agree that the arrangement CESR describes appears to be an Example 7. In our view, such a scenario is an inducement. It could nonetheless be considered a legitimate inducement where, in addition of being disclosed, it enhances the quality of the services provided to the sole clients who bear the relevant costs. Moreover, where the above two conditions can be met, in accordance with Article 21 of the implementing directive the investment manager will also need to have properly managed the conflict of interest arising from the fact that the equipment has been provided for the purpose of inducing the manager to trade with that broker in preference to other brokers. An effective tool to deal with a conflict as such, could be for the portfolio manager not to be informed of the origin of the equipment. 3

4 Example 8. See our comments to Para 22. ASSOSIM Question 6. Do you have any comments on the factors that CESR considers relevant to the question whether or not an item will be treated as designed to enhance the quality of a service to the client and not impair the duty to act in the best interests of the client? Do you have any suggestions for further factors? See our comments on the previous question. Question 7. Do you agree that it would not be useful for CESR to seek to develop guidance on the detailed content of the summary disclosures beyond stating that: such summary disclosure must provide sufficient and adequate information to enable the investor to make an informed decision whether to proceed with the investment or ancillary service; and that a generic disclosure which refers merely to the possibility that the firm might receive inducements will not be considered as enough? We agree that it would not be useful for CESR to seek to develop guidance on the content of summary disclosures. Question 8. Do you agree with CESR s approach that when a number of entities are involved in the distribution channel, Article 26 applies in relation to fees, commissions and non-monetary benefits that can influence or induce the intermediary that has the direct relationship with the client? We believe that distribution schemes as those described by CESR cannot constitute a way round the general principle in Article 19 and the requirement on firms to act honestly, fairly and professionally. Any firm in the chain should develop unbiased business strategies and direct its business to the most efficient channels in the best interest of the market. Behaviours as such should also be assessed against the best execution regime developed by the European Commission with regard to portfolio manager and RTO firms. Question 9. Do you have any comments on CESR s analysis of how payments between an investment firm and a tied agent should be taken into account under Article 26 of the Level 2 Directive? We agree with CESR s analysis that is the higher amount that is relevant for the purposes of Article 26. Question 10. Are there any other issues in relation to Article 26 and tied agents that it would be helpful for CESR to consider? We do not have any comments on this section. 4

5 Questions 11 to 13 - Softing and bundling arrangements Due to the cross-border nature of collective-portfolio management business, ASSOSIM believes that a common approach at EU level on softing and bundling would be extremely useful in order to assist firms in their coming into compliance with the provisions on inducement and best execution. 5